Higher Canadian Dollar To Impact Energy Companies

Canaccord Adams raised its forecast for oil prices in 2008 but said Canada’s energy companies will have a tough time padding profits because of the soaring Canadian dollar. Canaccord set a new price deck for benchmark West Texas Intermediate at US$70 a barrel next year, up from a previous estimate of US$65.

The brokerage’s assumption for the Canada-United States exchange rate also changed, with Canaccord now calling for a 0.91-cent Canadian dollar this year and a 0.94-cent dollar next year, versus a previous forecast of 0.86 cents and 0.87 cents, respectively.

Canaccord left its natural gas price assumptions unchanged at US$7.50 per million British thermal units this year and US$8.25 per mmBtu next year.

“Despite rising NYMEX natural gas prices and WTI crude prices, the impact on profitability of Canadian energy companies has been nominal,” Canaccord analyst Terry Peters wrote in note to clients.

In fact, we look at the price of crude and natural gas in Canadian dollars and in Western Canadian markets, due to the strengthening Canadian dollar, the price is relatively flat since the end of February. More significantly, the cost structure of the industry has suffered inflationary pressure so profit margins have been squeezed.

In light of the outlook changes, Canaccord also adjusted its estimates for some of Canada’s senior and junior E&Ps (explorers and producers), lowering its rating from ‘hold’ to ‘sell’ and target price from C$86 to C$83.50 for Husky Energy Inc. (HUSKF.PK), and lowering its rating for Imperial Oil Ltd. (IMO) from ‘buy’ to “hold’ with a raised target price of C$48 from C$45.

Canaccord lowered its rating of EnCana Corp. (ECA) from ‘buy’ to ‘hold’ because of share price appreciation.

Canaccord’s “Best Ideas” plucked from the list of Canadian E&Ps are Petro-Canada (PCZ), Talisman Energy Inc. (TLM), Oilexco Inc. (OILXF.PK), Duvernay Oil Corp. (DVNLF.PK), ProEx Energy (PXEYF.PK), Storm Exploration Inc., Breaker Energy Ltd. (BKRYF.PK) and Peerless Energy Inc.